Buy a house or refinance? A 30-year mortgage might not be your best option


Most people get a 30-year fixed rate mortgage, which has lower monthly payments. But there are still cases where it may make sense to consider a 15 or 20 year mortgage. Such loans will require you to make higher monthly payments, but they come with lower interest rates and allow you to build equity in your home much faster.

“A 30-year fixed rate mortgage isn’t always the best for a consumer. Most people just focus on monthly payments. But owning a home isn’t all about putting a roof over your head. It’s part of your overall financial plan, ”said Brian Blonder, senior vice president of residential loans at Capital Bank NA in Md..

Here are five questions to consider when making your decision.

1. What are the cost differences?

Suppose you borrow $ 300,000 to finance your house. A 30-year 3% mortgage will cost you $ 1,265 per month and $ 155,332 in interest over the life of the loan.

In contrast, a 20-year 2.75% mortgage will increase your monthly payments by $ 361. But that will reduce the total interest you pay on your home by almost $ 65,000. A 15-year 1.99% mortgage will cost you an additional $ 661 per month, but will save you over $ 108,000 in interest charges over the life of the loan. (Use this calculator to determine your mortgage payment amount.)

2. What are the tax implications?

There are generally two big tax advantages to owning a home, whatever type of mortgage you get: the ability to deduct mortgage interest you pay, as well as state and local property taxes.

But that only matters if you itemize the deductions on your federal return, which only a small minority of tax filers do so because for most people it is more beneficial to take advantage of the standard deduction.

If, however, you detail, ask an accountant if the tax savings you would get on a shorter term loan, say a 20 year mortgage, might make it affordable for you, and therefore an attractive alternative to the loan. 30 years old. , given your financial goals.

For example, while you will be paying around $ 361 more per month on the 20 year loan within $ 300,000 example above, you could significantly reduce that amount through tax savings if you are, say, the 25% tax bracket, said Blonder. For example, you will save $ 2,062 in taxes on your interest payments alone in the first year. Divided by 12, that’s $ 172 in tax savings per month. You’ll also save $ 750 per year, or $ 63 per month, if you pay $ 3,000 per year in property taxes.

So now that $ 361 more in monthly payments is actually just $ 126 more, Blonder explained.

You can do similar calculations on your 30-year mortgage – the net monthly payment will also be lower due to the tax savings if you itemize.

Once you compare the two monthly payments after taking into account the tax savings, the question is whether it’s worth it for you – and affordable – to spend a little more on a short-term mortgage in exchange for an increase in equity faster and a substantial reduction in the interest you pay to own your home.

“If building wealth is one of your goals, is it worth it to take it a step further and spend an extra $ 100-200 a month to dramatically accelerate your net worth growth?” Blonder said.

3. What else do you do with your money?

If you are really struggling financially to buy a home, a 30 year period may be your best bet as it offers the lowest monthly payments and you may need every remaining dollar just to cover your other essential expenses. .

But if you expect to have easy money each month on a 30-year loan, then think about where you will get the most bang for your buck with that money, suggested Mari Adam, a certified financial planner in Boca. Raton, Florida. .

What will my monthly mortgage payment be?

Since 1987, the annualized return on home prices has been 4.2%, according to the S&P CoreLogic Case-Shiller National Home Price Index.

So if you plan to put your extra money in a savings or investment account that earns less than that, you might be better off putting that money in place of a higher monthly payment on a higher loan. short term or make additional payments on your 30- year loan, Adam said.

But, she warned, “make sure you can make the biggest monthly payments without a doubt.” That is, you have enough emergency savings and other liquid assets to cover you in the event of job loss or other unforeseen impact on your cash flow.

4. If you are refinancing, how much time is left on your current mortgage?

If you’ve been in your home for several years and want to refinance for a lower rate, don’t go for another 30-year loan, Adam said. “If you have 10 years left, refinance over 10 years. [Otherwise] you pay the greater amount of [total] interest. Just replace what you have left on the clock unless there is a mitigating circumstance. “

As a mitigating factor, it means an unexpected blow to your finances, such as job loss or divorce, which can put you at risk of losing your home unless you can significantly reduce your monthly payments.

5. Do I want to pay for my house and if so, why?

Are you someone who just wants to pay off debts as quickly as possible and pay the bank less? If you can afford one, then a 15- or 20-year loan may be your best option, Blonder said.

As homebuyers get older, they may start to think about what they want to leave their kids behind or just love the idea of ​​no longer having debt in retirement.

How many houses can I afford?

Adam urges you to consider the counter-argument to both of these desires: you should always do what is best for you financially, and this will depend on your needs and the expected cash flow from your retirement assets and fixed income, such as social security or a pension. .

“It’s not about age. It’s about what leaves you in the best position to put your money to good use. Poor money is not smart. pocket to have a better life when you are older [is]. “

As for your children, if you can live well and leave something for them when you are gone, so much the better. But if not, that’s okay, she said. “Your kids can sort through their own lives.”

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